Project Required Investment Rate of Return Risk $4 million 5 million A. 14.0% High 11.5 High 3 million 9.5 Low 2 million 6 million D 9.0 Average 12.5 High 5 million 6 million 3 million 12.5 Average 7.0 Low 11.5 Low
Ziege Systems is considering the following independent
projects for the coming year:
Ziege’s WACC is 10%, but it adjusts for risk by adding 2% to the WACC for high-risk projects
and subtracting 2% for low-risk projects.
a. Which projects should Ziege accept if it faces no capital constraints?
b. If Ziege can only invest a total of $13 million, which projects should it accept, and
what would be the dollar size of its capital budget?
c. Suppose Ziege can raise additional funds beyond the $13 million, but each new
increment (or partial increment) of $5 million of new capital will cause the WACC to
increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which
projects should it now accept, and what would be the dollar size of its capital budget?
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